The United States of I ndia?

India Strategy
India Strategy
(Politics)
(Politics)
Nikhil Vora / Nikhil Salvi
IDFC Securities Ltd
(Dir) +91-22-6622 2567
(M) +91 98211 32471
Email: nikhil.vora@idfc.com
March 2012
Centre&StateOR CentrevsState
India Strategy (Politics)
India Strategy (Politics)
I n the happiness of his subjects lies the Kings happiness;
I n their welfare his welfare,
He shall not consider as good, only that which pleases him,
but treat as beneficial to him, whatever pleases his subjects
--- Chanakya, Arthashastra
Are todays Kings (read politicians) rediscovering this maxim.at least at the state level?
Todays Kings are increasingly being reminded of this maxim, as evinced from state level assembly elections in past two years, in which
regional parties that promised better governance were awarded with majority mandate (irrespective of incumbency factor!). With the Central
coalition in power faltering in spite of clear mandate in last general elections, and regional parties reading recent political winds correctly, we
hazard a guess that the next general elections may see a fragmented Parliament with coalition government of smaller regional parties having
little in common. Does this entail economic growth taking a backseat as the future Parliament labors to arrive at consensus over reforms?
We think otherwise, not because we believe coalition parties will put reforms over politics (unlikely, as history shows us), but because state
governments are increasingly using their constitutionally allocated powers to drive economic progress demanded by a younger electorate.
Post liberalization, the centre has limited to policy making, while investment function is increasingly taken up by private sector. Private
investments gravitate towards states with better infrastructure and policies conducive for business, thereby fuelling competition between
states to attract capital and investments that accelerate economic activity. Looking ahead, we believe this competition will only intensify and
with increasing decentralization of powers, tomorrows India, although in letter will still be a Union of States as envisaged in the
Constitution, but in spirit will more resemble The United States of India!.
This reminds me of something that VS Naipaul, the Nobel winning author once commented, Bihara place where civilization ends
Clearly, we dont agree!!!
3

United States of India

United States of India

? Better or Worse?
? Better or Worse?
The First Article of Constitution describes India as a Union of States, although the nature of
constitution is federal in structure
what is important is that the use of the word 'Union' is deliberate
Though the country and the people may be divided into different States for convenience of
administration, the country is one integral whole, its people a single people living under a single
imperiumderived from a single source
Dr B R Ambedkar , Chairman, Drafting Committee of the Indian Constitution
I t is the Union of I ndia which is the basis of our nationalityStates are but limbs of the Union,
and while we recognize that the limbs must be healthy and strongit is the strength and stability
of the Union and its capacity to develop and evolve that should be governing consideration of all
changes in the country
- The State ReorganisationCommittee
Questions we seek to answer
Questions we seek to answer

But how close is the reality of Centre-State relationsto that envisaged?

And what does that mean for economic growth of the country?
We revisit this idea in the backdrop of increasing strain in
Centre-State relations and results of recent assembly elections
4
5
What do recent Assembly Elections indicate?
What do recent Assembly Elections indicate?
West Bengal
Tamil Nadu
Uttar Pradesh
Punjab
Bihar
Kerala
India
Regional parties winning convincingly in recent assembly
elections.
..while National parties relegated to sidelines
Regional parties wining with majority votesat expense of National parties!
6
What do recent Assembly Elections indicate?
What do recent Assembly Elections indicate?

M
M
O
O
R
R
E
E

Onus towards better governance (voting even to incumbent)!

Move away from narrow caste /religion politics?
Economic aspiration demanding better politics/governance?
Regional parties gaining at expense of National parties!
What do the recent assembly elections
portend for 2014?
7
Are regional parties crowding out National parties?
Are regional parties crowding out National parties?
2014 General Elections?
India
2009 General Elections
8
India
9
D
D

j
j

vu 1996
vu 1996
-
-
99?
99?
plus a change, plus c'est la mme chose
(the more things change, the more they stay the same)
- J ean-BaptisteAlphonse Karr, in the Les Gupes, J anuary 1849
10 10
D
D

j
j

vu 1996
vu 1996
-
-
99?
99?
I s period of stable central government set for change after 3
consecutive stable five-year terms?
J un-91 May-96 May-96 Mar-97 Mar-98 Oct-99 May-04
May-09
5years 13days 13mths 10mths 11mths 5years 5years 5years
Loksabha
10th 11th 11th 11th 12th 13th 14th 15th
No of parties in
coalition
14
16
13 13
9
10
May-14
?
?
0%
25%
50%
75%
100%
1980 1984 1989 1991 1996 1998 1999 2004 2009 2014
Seats won - National Parties Seats won - Regional Parties
11 11
National parties ceding ground to regional parties?
National parties ceding ground to regional parties?
?
12 12
What can fragmented mandate in 2014 can mean to reforms?
What can fragmented mandate in 2014 can mean to reforms?
Can coalition governments (15+parties) provide political stability?
Can a fractured Parliament arrive at a consensus on reforms?
Reforms Parliament Act/Law Cabinet Key measures
FDI in single brand
retail
Land acquisition bill
Mining bill
Goods & services tax
Direct Tax code
J an Lokpal bill
Not required
FDI of 100% in single brand retail has come into effect; For FDI
> 51%, mandatory sourcing of at least 30% from the domestic
small and cottage industries!
Companies to pay at least 2x market price in urban and 6x in
rural areas; Companies shall provide for rehabilitation and
resettlement
Tax of 26% of profit of coal miners and 100% royalty for others;
Also, central and state cess to be levied on mining companies
Move towards a common indirect tax regime across the
country; According to CII, GST could add 1-1.5% to GDP
growth
Move towards a simplified direct tax structure and lower tax
rates; To improve tax collections due to lower evasions
It would enable filing of complaints against politicians and
bureaucrats without prior government approval

Not required
FDI in aviation
Not required FDI of 49% in aviation is on the cards!
Not required

13 13

BUT, nothing happening even now with stable

BUT, nothing happening even now with stable
govt
govt
!
!
Policy inaction - Key bills stalled
P
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D
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14 14

BUT, nothing happening even now with stable

BUT, nothing happening even now with stable
govt
govt
!
!
Government grappling with corruption and governance issues
Key economic decisions delayed
Inter
ministerial
friction
Ministry of
Environment
and Forests
Ministry of Coal
Ministry of Power
New Power projects orders down 25% yoy in FY12!
Corporate India sums it up best
Corporate India sums it up best

Theres a sense that the bureaucracy has stopped taking

decisions as they fear that action might be taken against them
in future even for honest mistakes.
- Sunil Bharti Mittal
I s I ntent to govern more important than majority in legislative bodies?
Invocation of Presidents rule in case of political instability -
article 356 invoked 65 times since Independence!
16 16
Is policy inaction masking underlying Centre
Is policy inaction masking underlying Centre
-
-
State friction?
State friction?
Key areas of
friction
No of times President's Rule imposed on states
Year 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10
No 4 10 18 12 9 11
More autonomy demanded for States
Raising resources from mineral wealth
Higher share in taxes, cesses and surcharges
In the period, FY09-FY11, there was net outflow from States to Centre
(States share of taxes minus Central grants)
Uneven distribution of Central grants
Bias towards states ruled by same party as the Centre
17
Policy inaction masking underlying Centre
Policy inaction masking underlying Centre
-
-
State friction
State friction

Recent
skirmishes
Goods and Services Tax Bill
Prolonged process of getting State governments to arrive at consensus
First announced Union Budget 2007-08
Initial date of implementation April 2010
Postponed multiple times to bring all states on board
When will it be implemented - ?
National Counter Terrorism Centre
State Governments alleging Centre infringing on Constitutional Powers
and Federal structure
National Counter Terrorism Centre being opposed by Gujarat,
Chhattisgarh, Bihar all three ruled by parties other than one at Centre!
Key opposition on infringement of rights of state security forces
18 18
Economic Outlook
Economic Outlook
So Is there hopefor
theeconomy??
19 19
Changes in Indian economy post
Changes in Indian economy post
liberalisation
liberalisation

Economy no longer solely driven by Central policy

States competing against each other for economic development
Competition between States for attracting
Capital
Investments
Creation of employment opportunities
Increased economic activities
Private sector investment gravitates towards states offering
better infrastructure and governance
Case Study: Tata
Case Study: Tata
Nano
Nano
production plant shift
production plant shift
20
Tata Motors started work on construction Singur plant in
West Bengal for Nano
Dec-06
Sep-08
Oct-08
J un-10
Within just one month, Tata Motors finalized location of
new production plant at Sanand, Gujarat
Singur plant started manufacturing, but immediately
shutdown due to law and order issues
Tata Motors decided to shift plant location to another state;
Four prominent states competed to host the new plant
Gujarat, Maharashtra, Karnataka, AP
New plant constructed in record time of 14 months
and inaugurated!
30
months
1 month
14
months
West Bengals loss is Gujarats gain Rs20bn investment; 10,000 jobs!
21 21
I s state level economic development beingdecoupledfrom
Central policy thrust ???
What drives economic growth today
What drives economic growth today

and tomorrow?
and tomorrow?
State
performance
vs
Centre
Per capita net State Domestic product (at constant prices)
- In 20 out of 28 states, Average for FY09-FY11 higher than Net National
Product (NNP)
Out of these 20 states, 11states were ruled by parties/coalitions other than
the one in Centre!
GUJ ARAT: Direct tax collection growth in Gujarat at 17%yoy for 2010-
11 was highest in the country Gujarat ruled by BJ P for past 2 terms
TAMIL NADU: #1 urbanised state among large states (48% of
population as per 2011 Census) TN ruled by regional parties
BIHAR: The share of services to the state GDP has increased from
50.5 per cent to 61.6 per cent in the past 10 years
22 22
I n the happiness of his subjects lies the Kings happiness;
I n their welfare his welfare,
He shall not consider as good, only that which pleases him,
but treat as beneficial to him, whatever pleases his subjects
What drives economic growth today..&.. tomorrow?
What drives economic growth today..&.. tomorrow?
Are todays Kings (politicians) rediscovering this maxim.at least at the state level?
The root of wealth is economic activity and lack of it brings material distress.
A king can achieve the desired objectives and abundance of riches by undertaking
productive economic activity, in the absenceof which, both current prosperity and
future growthare in danger of destruction.
Chanakya, Arthashastra
Chanakya, Arthashastra
Gujarat Maritime Board: State Initiative success
Gujarat Maritime Board: State Initiative success
23
Other states following Gujarat model Maharashtra (Dighi), Orissa (Dhamra, Gopalpur),
AP (Krishnapatnam), TN (Karaikal)
Port development is a Concurrent subject
Both Centre and State govt can set up ports
Port development in Gujarat far ahead of others
Gujarat government has actively promoted private port
development
19 operational ports (under state purview)
State ports in Gujarat handle 74%of traffic handled by all
non-major ports in India (ports out of Centres purview)
Bihar policy decisions: State Initiative success
Bihar policy decisions: State Initiative success
24
The UN gave $30,000 award to Bihar for its simplified taxation model!
Once upon a time .
Bihara place where civilization ends - V S Naipaul, Nobel-
prize winning author
Today.
Only state with 50% seats in municipal bodies reserved for women
Fast track courts fastest judgment delivered in 13 days
5,000 ex-soldiers recruited into special auxilliaryforce to check crime
New and simplified Patna model of taxation
Property taxes based on local area and use of property
Other states following similar model
50% decline in girl students dropout rate after the state government
spent Rs2bn providing bicycles to girl students reaching 9
th
standard
Innovative means of tackling corruption attach properties of corrupt
bureaucrats
Metro Rail Projects: Another State Initiative
Metro Rail Projects: Another State Initiative
25
Success of Delhi Metro spurring Metro
projects across major cities of India
Mumbai Metro Phase-1 under construction;
Phase-2 awarded
Bangalore Metro under construction
Chennai Metro under construction
Kolkata Metro expansion under construction
J aipur Metro Bids invited
Kochi Metro Under planning phase
PuneMetro Feasibility Studies underway
(12)
-
12
24
36
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
FII Net investment ($bn) FDI Investment ($bn)
Does FY12 foretell future trend for India? FDI > FII?
Does FY12 foretell future trend for India? FDI > FII?
26
I n FY12 (worst year of current government in terms of governance), FDI inflows surpassed FI I !
Going forward, FDI into states may remain steady, FI I investments may become volatile
While Centre will
implement policies, states
will drive investments
Crystal gazing
Crystal gazing

.Weak Centre
.Weak Centre

.Stronger states?
.Stronger states?
27
I s local economic growth giving State governments leverage over Centre?
increasingly younger electorate forcing governments to focus on
economic growth
reality increasingly accepted by
regional parties.
Major policy decisions still in
Centres purview
and enforced by recent election
results
but increasing autonomy to be
given to States
Competition for showcasing
economic growth to voters a
reality
E.g. FDI in retail, Land Bill,
Environmental policies
Development focused parties re-
elected in Gujarat (BJ P), Bihar (J D)
Difficulty in administering
geographically large and populous
country like I ndia
Election manifestos of winning parties
focusing on economic growth rather
than freebies
Political Political
power power
shifting shifting
to to
states states? ?
Crystal gazing
Crystal gazing

.But what can go wrong?

.But what can go wrong?
28
Will State Governments pick up the gauntlet of economic development within their scope?
State Governments squandering away mandate for
economic development.
.by pandering to populist (read money-losing)
policies; E.g. no increase in power tariffs in Tamil Nadu
for past five years, delays in power tariff increase in WB
State fiscal position deteriorating due to political
largess'
Crystal gazing...What will Centre
Crystal gazing...What will Centre
-
-
State relation be like?
State relation be like?
29
How will the Centre-State relationship appear in the future of I ndia?
Even if one State Government falters on economic
development, others waiting to capture the opportunitycase
in point Tata Nano production shift to Gujarat
Stronger economic growth will embolden states to
oppose Central dictats..case in point NCTC Bill
Increasing decentralisation of economic policy
making
States to be the ground zero for both politics and
economics, shifting focus away from Centre
In letter,
In letter,

Union of States
Union of States

, but in spirit
, but in spirit

United States of India

United States of India

?
?
30
Thank You
Nikhil Vora
(Dir) +91-22-6622 2567
nikhil.vora@idfc.com
32 32
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